Fake notes: RBI lodges FIR against 81

An FIR has been lodged at Gomti Nagar Police station against 81 persons for submitting Fake Indian Currency Notes (FICN) of Rs 46,800 by Reserve Bank of India (RBI), Lucknow. The complaint was lodged by Assistant General Manager of RBI Lucknow Shalini Sachan on Friday. The case has been lodged after the receipt of fake currency at RBI Lucknow, by the accused persons who came to change their old and torn currency notes with new ones, said PK Srivastava, spokesperson of DIG Lucknow. The RBI had lodged the last complaint for receiving FICN of Rs 98,900 at Gomti Nagar Police station on June 30. While the recovery of FICN is alarming, investigations into these cases often end up into final reports finding none of the accused involved in the making or transportation of FICN.

IE

Repo rate revision flayed

The recent revision of repo rate by the Reserve Bank of India would severely impact the already slipping industrial growth momentum and country's overall development, besides causing further escalation in prices of manufactured goods, the Tamil Nadu Chamber of Commerce and Industry has said. In a statement, chamber president N. Jegatheesan wondered whether the RBI move would have any impact in moderating inflation or bringing down prices of commodities. On the other hand, the enhancement of repo rates by 50 basis points and the resultant increase in bank interest rates would compound the woes of the industrial sector which saw a deceleration in output in April-May, he said.

HBL

HEED RBI’S WARNING - Fiscal and administrative measures are needed to reinforce monetary policy

The message from Tuesday’s monetary policy announcement by the Reserve Bank is that we will have to live with inflation and moderating growth for some more time due to a combination of domestic and global factors. The RBI has in fact revised its wholesale price index up to seven per cent for March 2012, against the six per cent it projected in May. This is due to rising crude prices, domestic demand-supply factors and the likely demand scenario in the months ahead. Commodity prices are unstable globally, and a constant source of inflationary pressures. But the nagging question that remains is whether the RBI’s monetary policy is the only weapon available to control inflation. It has been noted that since March 2010, the repo rate (that at which the RBI lends to banks) has been hiked by 2.25 per cent, while inflation has declined in this period by less than one per cent — from 10.3 per cent to 9.4 per cent. Inflation remains stubbornly high, but growth is decelerating. The RBI’s controlled exasperation over the government’s ineffectiveness in controlling inflation is spelt out clearly in the monetary policy document. It makes it clear that the RBI was forced to take harsher measures in “the absence of complementary policy responses on both the demand and supply sides”.  Sound policies are needed to keep the supply of various products — particularly essential items — in pace with demand. The RBI, for instance, has warned that if the rains are not even in different parts of the country, and crops like coarse grains and pulses and protein-rich items are affected, food inflation will rise further. One hopes the government is listening, and will arrange for imports if there is a shortfall in the production of these items. India has huge foreign exchange reserves, and such imports, done in time, can prevent spiralling food inflation. The government must act on several fronts — taking both fiscal and administrative decisions swiftly — if inflation is to be controlled. The other critical issue is the fiscal deficit, which could overshoot the government’s 4.6 per cent target. Fiscal consolidation is critical to managing inflation, the RBI noted, but the government is yet to cut down on frivolous and unproductive spending, which are inflationary, and invest in badly-needed infrastructure.

BS

RBI imposes Rs 5 lakh penalty on KCCB for violating norms

AHMEDABAD: The RBI today imposed apenalty of Rs 5 lakh on city-based Kalupur Commercial Co-operative Bank (KCCB) for its non-adherence to mandatory banking rules, an official statement said. A penalty of Rs 5 lakh has been imposed on KCCB for violation related to Know Your Customer (KYC) norms, membership to co-operative credit societies, displaying short name of the bank, extension of credit outside the area of operations, it said. The apex bank had served a show cause notice on the cooperative bank in response to which the bank submitted a written reply and made further submissions during the personal hearing by the regional director, the statement said.  On the bank's reply, the central bank came to the conclusion that the violations were substantiated and warranted imposition of the penalty, it said.  KCCB, is a multi-state scheduled bank with over 30 branches.  

ET

The inflation war begins

Lack of investment in the manufacturing space, besides the spill-over effect from primary products, has pushed inflation to alarming levels.

The RBI's unexpected 50 basis-point hike in repo rate to 8 per cent shocked the markets. But, then, the central bank may not have had any other option to counter inflation; the 10 rate hikes till June and two bumper crops have done little to curb prices. From an inflationary situation that was driven primarily by food prices, we now have a situation of a more broad-based inflation, as acknowledged by the RBI itself.  Even as the inflation worry raged across Asia , most countries in the region, barring India, have managed to curb pricing pressures reasonably well. So what has led to this persistent pressure in India that has pushed the RBI to a more aggressive monetary policy mode? And would this put an end to the rallying prices? Sadly, there are reasons to believe that the inflation scare may not fade any time soon.  Let us first look at the length and magnitude of the inflation problem. While the average inflation was 5.5 per cent between 2006 and 2009, we have now had a whopping 19 months of over 6 per cent growth in the Wholesale Price Index (WPI) on a year-on-year basis.  Seventeen of these months saw inflation in the 9-10 per cent range. Clearly, the time period over which the current high level of inflation has lasted is above normal and a little disconcerting.  Moving to the constituents of the WPI basket, primary products (of which food accounts for a good 70 per cent) index has been expanding in double-digits for 22 months now. While the drought in 2009 was believed to have driven grain and fodder prices to steep levels, that primary products inflation never returned to single-digit, post the bumper summer and winter crops in 2010, does little to explain the still-elevated levels of primary article prices.  Contrary to belief that the recent administered price hikes in fuel would aggravate inflation, this index has been on a high for quite a while. The fuel index, has been on a double-digit trajectory for 17 months now, far ahead of the average of 4 per cent between 2006 and 2009. The last, but most important component of the basket, manufactured products, may have been slow to register an increase, but their effect appears to be the most lethal of them all. With a 65 per cent weight in the WPI, a rise of a couple of percentage points in this index can cause damage. To understand the impact that manufactured non-food products (called core inflation) can have on the headline numbers, consider the following:  Way back in January 2010, headline inflation was 8.7 per cent, when food inflation was a frightening 19.8 per cent and core inflation at a sedate 3.7 per cent. Now, with the food inflation down to 8.3 per cent; core inflation, at 7.3 per cent, has been the key trigger to push headline numbers higher to 9.4 per cent.  The accompanying chart indicates that the WPI surge between December 2010 and June 2011 has been steeper than earlier periods as a result of core inflation contributing more to the inflation pie. While food and fuel inflation are known to be volatile it was the core inflation numbers that kept headline inflation under check or reined it back to comfortable levels on earlier occasions.  This was also made possible by the surge in investment as a proportion of GDP up to 2007-08. The supply from added capacities kept prices of manufactured products under check.  However, this time around, the RBI itself has expressed concerns over a soft patch in gross fixed capital formation (GFCF), visible from the second half of 2010-11. For instance, GFCF expanded by 19.2 per cent in the last quarter of FY-10 compared with a sluggish 0.4 per cent in the March 2011 quarter; this number being lower than any other March quarter since 2008.  Clearly, the spill-over effect of primary products inflation on manufactured goods, accentuated by lack of investment in the manufacturing space has pushed inflation to levels not easily reversible. The above sticky phenomenon of inflation clearly suggests that the RBI's baby steps of 25 basis point rate hike eight times between March 2010 and March 2011 did not help much.  With a steep 50 basis points in May 2011, on realising that demand-pull issues were fuelling inflation more than was anticipated, followed by another 50 basis point hike now, will the RBI be successful in curbing the more raging issue of demand? Easier said than done for the following reasons:

A moderation in manufactured non-food product inflation would be possible only if there is a softening of input costs and easing of demand. Let us take the first case. While commodity prices have shown signs of easing, fuel, a key input in most industries, would only now kick-start its journey upward.  While the direct impact of the recent administered fuel price hike on the WPI is only 0.7 per cent, the indirect impact, through user industries, could be much higher. Two, while electricity price inflation has remained moderate, it may be only a matter of time before the price increases in coal and mineral oils are felt in electricity prices.  Three, while it has to be acknowledged that demand has moderated as seen in auto sales, industrial production and purchasing managers index (PMI), it needs to be kept in mind that surging exports and non-oil import growth may not slow enough, especially the former, given the tight capacity globally. Fiscal risks arising from mounting subsidies too pose a threat to investments, keeping interest at elevated levels. If these are the challenges to curb demand, the food problem is no better. Even as a normal monsoon can be expected to soften food prices, the recent hike in minimum support prices (MSP) in some of the agri-commodities can set the index rolling northward again, as MSPs typically set the floor for market prices. Shortage of labour and steep hike in labour costs may also offset the price benefits of an otherwise good bounty. Permanent solutions to the food problem lie in addressing issues such as poor irrigation facilities, low yields, lack of proper storage and transportation facilities. These gather importance, more than ever, with consumption gaining ground.

HBL

This is Where it Really Hurts, Governor Subbarao - Malini Goyal and Tulika Raj

RBI’s surprise 50 basis points interest rate hike this week was met with dismay by consumers and India Inc. But while big companies and car/home buyers get all the headlines, the sharpest impact of the ultra hard monetary policy is felt by the relatively smaller companies. They expanded capacities in the past two years — now many are grappling with underutilisation of plant as consumer demand turns sluggish in many sectors. Investments are on hold, some have imposed hiring freeze and operational costs are being trimmed. Being small, not many have the size and access to cheaper foreign currency funds. The following stories from five firms with turnovers ranging from 186 crore to 2,881 crore, give an idea of the entrepreneurial battles being fought as the cost of capital rises.  We have a foreign currency loan $100 million, used to fund our Sylvannia buy in 2007. We take short-term loans ( 50-200 crore) to fund our working capital needs. There is no problem with our foreign currency loan. May be when we refinance it next year it might get a bit expensive but not like what it is in India. Our distributors and dealers are experiencing a rise in cost in their working capital. So to help them we have taken compensatory measures – we typically give them a cash discount of 2% but early this year we have increased it to 2.5%. This would have dented our bottomline by around 15 crore. But for us the bigger worry is that interest rate hike has impacted construction activities which in turn is affecting demands for our goods. We are pushing for internal efficiency. Today we maintain a 60-day inventory of about 400 crore. We want to reduce it to around 52 days this year. Most of us increased our capacities in the past few years. We doubled our capacity in the past three years. Our plants are operating at a suboptimal levels. We are setting up a 500-crore plant near Bhiwadi for which we need to take a bank loan. Also, our working capital (typically under 50 crore) is financed through short-term loans. We had tied up our 300-crore loan at a fixed rate of 9.5-10% beforehand. Hence, our project cost hasn’t gone up. If I had to go the market to tie up funds today, the interest rate cost would have gone up by 2-3% higher. But our working capital cost has gone up by 1.5-2% . The direct impact of interest rate hike is not much. If I had to take a fresh loan perhaps it would have hurt. But its the impact of interest rate hike on consumer demand that worries us. So far we were busy managing growth. Now the focus has shifted to managing costs. We are looking at low-cost automation like pick-and-place robots for low skilled jobs. But my biggest worry is slowing demand and government’s lack of concern for the manufacturing industry. Not a single announcement has been made which makes me feel good.

ET